John Lewis claims the error came from its policy of “pay averaging”. The policy was supposed to mean that employees are paid the same amount year on year irrespective of how many hours they work each month in order to provide regularity and security. This, however, ultimately led to some employees being paid less than the minimum wage in some months.

How should the NMW be calculated?

Pay averaging on an annual basis is an incorrect way of calculating an employee’s hourly wage for the purposes of complying with the NMW.

An employee’s average hourly pay has to be at least the NMW. It’s worked out over the period each pay packet covers – so for an employee who gets paid once a month, this period will be one month. If they are paid weekly, the period is one week.

By way of an example, an employee over the age of 25, should be paid the Living Wage of £7.50 per hour. Therefore if they work 100 hours a month, their monthly pay should be at least £750.00 for that month.

What counts as pay under NMW?

The NMW Legislation makes it clear that the total remuneration in a relevant pay reference period, i.e. one month if the employee is paid monthly, consists of gross pay including overtime pay, commissions, bonuses and allowances (before deductions for income tax and National Insurance Contributions) minus payments and deductions that do not count towards the NMW.

Payments that aren’t included are benefits in kind (whether or not they have a monetary value), loans by the employer, advances of wages, pension payments, lump sum payments on retirement, redundancy payments, tribunal or settlement awards and any premium paid for overtime or shift work. This list is not exhaustive but they are all categories of funds that are to be ignored when calculating remuneration. In other words, they ought not be included when calculating whether an employee has received the NMW for the reference period s/he has worked.

What does this mean to you?

If it is calculated that the NMW has not been provided for a reference period, then the employer will have to compensate the employee accordingly.

This note therefore acts as a reminder in an attempt to prevent other employers falling foul of the rules relating to the NMW.

Should you require any advice on the above then please Talk to Tollers, we are HeRe for you.

Our dedicated Employment Team are here to help should you have any queries regarding the above, do not hesitate to contact us on 01604 258558.

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